Private Eyes on Retail

Private equity money continues to pour into the retail sector. In January alone, Sports Authority and Burlington Coat Factory were purchased by private equity. A portion of the mega-Albertson's deal was also funded by another private equity firm. And most observers think that Saks Inc.'s Parisian and Federated Department Stores' Lord & Taylor department store chains will eventually end up in the hands of private equity.

In January, Sports Authority was purchased for $1.3 billion by an affiliate of Leonard Green & Partners L.P. Meanwhile, Bain Capital acquired Burlington Coat Factory for $2.1 billion. Prior to that, Sears, Toys ‘R’ Us and Shopko were purchased in whole or in part by private equity.

But is this really what's best for the industry? After all, private equity firms don't have a sparkling track record in retail takeovers. For example, Sears, acquired by ESL Investments Inc.-controlled Kmart Holding Corp., saw its domestic same-store sales decline 11.9 percent during November and December. Kmart meanwhile, posted a 1 percent increase — below the industry's pace of 3.5 percent growth.

Kenneth Wong, president of Westfield America Inc. for one, recently questioned the long-term potential: “It's dangerous to have non-merchants heading up retail,” Wong said at an Urban Land Institute meeting. “You have to have exciting reasons for consumers to visit.”

Stan Eichelbaum, president of Marketing Developments Inc., a retail consulting firm, has similar concerns.

“It's a very scurrilous scenario for retailers to be left out of ownership,” Eichelbaum says. “Retail is a business of passion. It needs the artist-slash-scientist running the organization.”

Problem is, there seems to be a shortage of artist-slash-scientists, he says, suggesting the dearth of proven retail executives helped pave the way for private equity to move in.

“When Neiman Marcus was in trouble, they called on Allen Questrom. When Barney's was in trouble, they called on Allen Questrom. When Federated was in trouble they called on Allen Questrom. And when JCPenney was in trouble, they called on Allen Questrom,” Eichelbaum says. “If that's not a sign of a shortfall of talent, what is?”